A report

On

CAPITAL BUDGETING
In
NAGARJUNA FERTILIZERS AND CHEMICALS LIMITED

A project report compiled and submitted In the partial fulfillment for

the award of

“MASTER OF BUSINESS ADMINISTRATION”

By
SHAIK PHEERIBHI
Under the guidance of
Department of Management Studies
RAGHU INSTITUTE OF TECHNOLOGY
VIZAG.

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 ACKNOWLEDGEMENT

I wish to take this opportunity to express myself my deepest sense of gratitude to my

project guide for his able guidance and kind co-operation extended to me on
successfully bringing this project.

I would like to express my sincere gratitude to Sri. Mr. P. S. N. MURTY, D.G.M

(Finance), Mr. Y. RAMA DEVI (Head-Training) for their valuable guidance and
timely suggestions and encouragement given to me through out the project work.

Last but not the least I thank one and all who have contributed their part in helping
me my Endeavour to accomplish the object of completing this project work.

I thank all those who directly and indirectly associated with the preparation of the
project work.

(SHAIK PHEERIBHI)

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 CONTENTS
CHAPTER 1 INTRODUCTION
- Scope of Financial Management

- Functions of Financial Management

- Identification of relevant groups

- Objectives of Financial Decision Making

- Other methods of Financial Management

- Importance of Financial Management

- Methodology of the study

- Objectives of the study

- Limitations of the study

CHAPTER 2 INDUSTRIAL PROFILE

- About Fertilizer

- Fertilizer Types
Nitrogen, Phosphorus, Potassium

- Food for the growing world

- State Regulations

- Assessing fertilizer safety

- Fertilizers committee work in industry

CHAPTER 3 COMPANY PROFILE

- About the founder of NFCL

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 - Finance

- Living Harmony with nature

- Values statement of NFCL

- NFCL Functions

- Employee Focus

- Customer Focus

- Shareholders Focus

- Awards and honours

- Other Groups of companies of NFCL

- Future plans of the company

- Welfare measurements in NFCL

- NFCL Objectives

- Finance Department in NFCL

CHAPTER 4 THEORETICAL FRAME WORK OF

CAPITAL BUDGETING
- Meaning of Capital Budgeting

- Capital Budgeting Process

- Techniques of Investment Appraisals

(A) Traditional (B) Modern

- Co2 Recovery Plant

- Cash Flow Statement

- Balance Sheet of NFCL

4
INTERPRETATIONS
FINDINGS
SUGGESTIONS
BIBILOGRAPHY

5
 INTRODUCTION

Financial Management is an Integral part of overall management. Finance

function has become so important that it has given birth to financial management
as a separate subject. Finance is one of the basic foundations of all kinds of
economic activities. It is the master key which provides access to all the sources
for being employed in manufacturing and merchandising activities. It has rightly
been said that business needs money to make more money. However, it is also
true that money begets more money, only when it is properly managed. Hence,
efficient management of every business enterprise is closely linked with efficient
management of its finances.

Finance Management includes the activities concerned with the planning,

raising, controlling and administering of the funds used in the business. It entails
planning for the future of a person or a business enterprise to ensure a positive
cash flow. It includes the administration and maintenance of financial assets.
Besides, financial management covers the process of identifying and managing
risks. Finance can be classified into two major parts:
The subject of Financial Management is of immense interest to both academicians
and practicing managers. It is of great interest to academicians because the subject
is still developing, and there are still certain areas where controversies exist for
which no unanimous solutions have been reached as yet. Practicing Managers are
interested in this subject because among the most crucial decisions of the firm are
those which relate to finance and an understanding of the theory of financial
management provides them with conceptual and analytical insights.

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 Scope of Finance Management:

Firms create manufacturing capacities for production of goods; some provide

services to customers. They sell their goods or services to earn profits. They raise
funds to acquire manufacturing and other facilities. Thus, the three most important
activities of a business firm are:
 Production
 Marketing
 Finance

A firm secures whatever capital it needs and employees it (finance activity) in

activities that generate returns on invested capital (production and marketing
activities). A business firm thus is an entity that engages in activities to perform the
functions of finance, production and marketing. The raising of capital funds and
using them for generating returns to the supplies of funds is called the finance
function of the firm.

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 FUNCTIONS OF FINANCIAL MANAGEMENT
Financial decisions refer to decisions concerning financial matters of a
business firm. There are many kinds of financial management decisions that the firm
makes in pursuit of maximizing shareholder’s wealth, viz., kind of assets to be
acquired, pattern of capitalization, distribution of firm’s income etc. We can
classify these decisions into three major groups:

• Investment decision
• Financing decision
• Dividend decision

Investmen
t Decision

Financing Dividend
Decision Decision

I) Investment Decision:
Investment Decision relates to the determination of total amount of assets to held in
the firm, the composition of these assets and the business risk complexions of the
firm as perceived by its investors. So, the investment decisions are the decisions
relating to assets composition of the firm. The investment decisions include not

8
only those that create revenues and profits (e.g. introducing a new product line) but
also those that save money.
The investment decisions can be classified under two broad groups :
(i) Long-term investment decision and
(ii) Short-term investment decision,
The long-term investment decision referred to the capital budgeting and the short-
term investment decision referred to working capital management.

The Capital Budgeting decisions are more crucial for any firm. Capital budgeting is
the process of making investment decisions in capital expenditure. These are
expenditures, the benefits of which are expected to be received over a long period of
time exceeding one year. The finance manager has to assess the profitability of
various projects before committing the funds. The investment proposals should be
evaluated in terms of expected profitability, costs involved and the risks associated
with the projects.

Working Capital Management, on the other hand, deals with the Management of
current assets of the firm. Though the current assets do not contribute directly to the
earnings, yet their existence is necessitated for the proper, efficient and optimum
utilization of fixed assets. There are dangers of both the excessive working capital as
well as the shortage of working capital. A finance manager has to ensure sufficient
and adequate working capital to the firm.

II Financing Decisions:
Once the firm has taken the investment decision and committed itself to new
investment, it must decide the best means of financing these commitments.
Since, firms regularly make new investments, the needs for financing and
financial decisions are on going. Hence, a firm will be continuously planning for
new financial needs. The financing decision is not only concerned with how best
to finance new assets but also concerned with the best overall mix of financing
for the firm.

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III) Dividend Decisions:
The establishment of dividend policy is another important function of
finance manager which involves the determination of the percentage of profits
earned by the enterprise which is to be paid to its shareholders. The dividend
decision is concerned with the quantum of profits to be distributed among
shareholders. A decision has to be taken whether all the profits to be distributed,
to retain all the profits in business or to keep a part of profits in the business and
distribute other among shareholders.
The higher rate of dividend may raise the market price of shares and thus,
maximize the wealth of shareholders. The firm should also consider the question
of dividend stability, stock dividend (bonus shares) and cash dividend.

Functional areas of Modern financial management

Modern financial management performs several functions, following
are important functional area of modern management.

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 Identification of the relevant groups:
The various groups which may have stakes in the financial decisions
making of a firm and therefore required to be considered while taking financial
decisions are:
 The shareholders
 The debt investors,
 The employees,
 The customer and the suppliers,
 The public,
 The Government, and
 The Management

Objective of the Financial Decision Making

The main objective of a business is to maximize the owner’s economic
welfare. This objective can be achieved by :
 Profit Maximization and
 Wealth Maximization

Profit Maximization
For any business firm, the maximization of the profits is often
considered as the implied objective and therefore it is natural to retain the
maximization of profit as the goal of the financial also.
The profit maximization as the objective of financial management has a built
in favor for its choice. The profit is regarded as yard stick for the economic
efficiency of any form. If all business firm of the society are working towards
profit maximization then the economic resources of the society as a whole would
have been most efficiently, economically and profitably used.

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The profit maximization by one firm and if targeted by all, will ensure the
maximization of the welfare of the society. So, the profit maximization as
objective of financial management will result inefficient allocation of resources
not only from the point of view of the firm but also for the society as such.
 It ignores the risk.
 The profit maximization concentrates on the profitability only and ignores
the financing aspect of that decision and the risk associated with that
financing.
 It ignores the timings of costs and returns and thereby ignores the time value
of money
 The profit maximization as an objective is ague and ambiguous.
 The profit maximization may widen the gap between the perception of the
management and that of the shareholders.
 The profit maximization borrows the concept of profit from the field of
accounting and thus tends to concentrate on the immediate effect of a
financial decisions as reflected in the increase in the profit of that year or in
near future.

Wealth Maximization :
This objective is generally expressed in term of maximization of the value of
a share of a firm. It is necessary to know and determine as to how the
maximization of shareholders wealth is to be measured.
The measure of wealth which is used in financial management is the concept
of economic value. The economic value is defined as the present value of the
future cash flows generated by a decision, discounted as appropriate rate of
discount which reflects the degree of associated risk. This measure of economic
value is based on cash flows rather than profit. The economic value concept is
objective in its approach and also takes into account the timing of cash flows and
the level of risk through the discounting process.

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 Profit Maximization Versus Wealth
Maximization:
The objective of profit maximization measures the performance of a firm by
a looking at its total profit. The objective of maximization of the shareholders
wealth is operational and objective in its approach. A firm that wishes to
maximize the profits may opt to pay no dividend and to reinvest the retained
earnings, whereas a firm that wishes to maximize the shareholders wealth may
pay regular dividends.

Other Objectives of Financial Management

Financial Management has been playing a vital role in achieving the following
objectives also.
1. Ensuring a fair return to shareholders.
2. Building up reserves for growth and expansion.
3. Ensuring maximum operational efficiency by efficient and effective
utilization of finances.
4. Ensuring financial discipline in the organization.

IMPORTANCE OF FINANCIAL MANGEMENT:

Finance Management is of greater importance on the present corporate world. It is

indispensable in any organization as it helps in :

i. Financial planning and successful promotion of an enterprise;

ii. Acquisition of funds as and when required at the minimum possible cost;

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iii. Proper use and allocation of funds;
iv. Taking sound financial decisions;
v. Improving the profitability through financial controls;
vi. Increasing the wealth of the investors and the nation
vii. Promoting and mobilizing individual and corporate savings.

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 METHOLOGODY OF THE STUDY

The required for this study would be collected through two sources i.e.,

METHODS

PRIMARY
Primary
DATA
PRIMARY data
DATA SECONDARY DATA

1. Primary Data:

The primary data comprises information obtained by the candidate during

discussions with Heads of Departments and from the meeting with officials and
staff.

2. Secondary Data:

The secondary data has been collected through Annual Reports,

Bulleting and other Printed Materials supplied by the Company.

In the present study 2/4th of the total information of time is from

primary data and the rest is from the secondary data.

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 OBJECTIVES OF THE STUDY

This project work is mainly focused to attain the following major objectives.
They are

1. To know about the fertilizer industry and business activities of M/s.

Nagarjuna Fertilizers and Chemicals Limited, Kakinada.

2. To study the ability of the firm to meet its current requirements.

3. To study the extent to which the firm has used its long-term solvency by
borrowing funds.

4. To study the overall operating efficiency in performance of M/s. Nagarjuna

Fertilizers and Chemicals Limited, Kakinada.

5. To study the efficiency with which the firm is utilizing its various assets in
generating sales.

6. To suggest guidelines to the company for improving its financial position

7. To study the estimated outcomes of new projects and its benefits

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 LIMITATIONS OF STUDY

1. The study is limited to NFCL, Kakinada; it does not relate to any

other company of Nagarjuna Group or other firm’s of Fertilizer Industry.

2. The smaller time frame for understanding this study is also a

significant limitation.

3. Uncertainty: the future business success is today’s investment

decision. The future in the real world is never known with certainty.

4. Difficult to measure in quantitative terms: Even if benefits are

certain, some might be difficult measure in quantitative terms.

5. Time Element: the problem of phasing properly the availability of

capital assets in order to have them come “on stream” at the correct time.

6. Unrealistic assumptions: Risk and uncertainty is not considered in the

business environment, cash flows are received in lump sum at the end of the
period, and the cost of capital and discount rate are one and the same. These
are some of the unrealistic assumptions of capital budgeting.

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18
19
 INDUSTRIAL PROFILE

India has been predominantly considered as an agricultural dependent economy.

Agriculture plays a very dominant role as more than one-fourth of our GDP come
from this sector. Nearly 70% of population depends on the agriculture for their
lively-hood. The basic need for an agricultural dependant economy is fertilizers and
urea is one of the main fertilizers. India is the second largest manufacturing country
in the world.

All fertilizers consist if three main ingredients.

Nitrogen—(N) -- which promotes general plant growth

Phosphorous—(P) -- which promotes flowering
Potassium – (K) – which promotes strong roots.

The ingredients are mixed in various combinations because plants have different
needs.

The combinations are indicated by a three number code:

The first number is the percent of nitrogen (N)

The second number is the percent of phosphorus (P)
The third number is the percent of potassium (K)

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About Fertilizer:
Fertilizer is simply, plant food. Just like the human body needs vitamins and
minerals, plants need nutrients in order to grow. Plants need large amounts of three
nutrients – nitrogen, phosphorus, and potassium. These are commonly referred to as
macronutrients. Fertilizer makers take those three nutrients from nature and put
them into soluble forms that plants can easily use.
There are a number of other nutrients plants need in small amounts. These
are referred to as the minor nutrients, or micronutrients. These many nutrients are
typically produced separately, but end up being mixed together in varying amounts
to match the needs of a particular crop. The analysis found on each bag or bulk
shipment of fertilizer tells the farmer or consumer the amount of nutrients being
supplied. States have a system of laws and regulations that ensure the fertilizer is
properly labeled and delivers the amount for nutrients stated on the bag.
Our world would be vastly different without commercial fertilizers.
Following World War II, new technologies allowed for the rapid expansion of
fertilizer production. Coupled with growing food demand and the development of
higher-yielding crop varieties, fertilizer helped fuel the Green Revolution. Today,
the abundance of food we enjoy is just one way fertilizers help enrich the world
around us.
While fertilizers provide many important benefits that are necessary for our
way of life, the improper use of fertilizers can harm our environment. We’ve used
the most recent developments in science to study our products and make sure safety
comes first.

FERTILIZER:
Fuel for growing plants just like humans and animals, plants need adequate
water, sufficient food, and protection from diseases and pests to be healthy.
Commercially produced fertilizers give growing plants the nutrients they crave in

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the form they can most readily absorb and use: nitrogen (N), available phosphate (P)
and soluble potash (K), Elements needed in smaller amounts, or micronutrients,
include iron (Fe), zinc (Zn), copper (Cu) and boron (B).

Each crop year, certain amounts of these nutrients are depleted and must be
returned to the soil to maintain fertility and ensure continued, healthy future crops.
Scientists project that the earth’s soil contains less than 20 percent of the organic
plant nutrients needed to meet our current food production needs. Therefore,
through the scientific application of manufactured fertilizers, farmers are meeting
the challenge of the future, today.
Another component of plant DNA is phosphate, which helps plants to use
water efficiently. It also helps to promote root growth and improves the quality of
grain and accelerates its ripening. And potassium, commonly called potash, is
important because it is necessary for photosynthesis, which are the production,
transportation and accumulation of sugars in the plant. Potash makes plants hardy
and helps them to withstand the stress of drought and fight off disease.

Fertilizer Types:
Because every crop is different and the soils and weather conditions crops
are grown in vary dramatically around the world, commercial fertilizers, which are
manufactured from natural sources, come in many formulations.
Combining air with hydrogen using natural gas as the feedstock makes
ammonia, the building block for nitrogen fertilizers. Ammoniated phosphates,
which include mono ammonium phosphate (MAP) and diammonium phosphate
(DAP), are made by reacting ammonia with phosphoric acid. Muriate of potash,
also called potassium chloride, is made from mine ores that have been processed to
remove naturally occurring salts.
Ammonium nitrate is a solid fertilizer containing approximately 34 percent
nitrogen that is water soluble and used in various fertilizer solutions. Aqua

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ammonia is another nitrogen-based fertilizer made by combining ammonia with
water. It contains up to 25 percent nitrogen and is either applied directly to the soil
or is used to manufacture phosphate fertilizers.
Nitrogen solutions are water solutions of ammonia, ammonium nitrate and,
sometimes, urea, a solid fertilizer containing approximately 45 percent nitrogen, and
other soluble compounds of nitrogen. Nitrogen solutions are used in ammoniating
super phosphate, the manufacture of complete fertilizer and for direct injection into
the soil.

NITROGEN (N):
Nitrogen is a part of all plant proteins and is a component of DNA and RNA
– the “blueprints” for genetic characteristics. It is necessary for plant growth and
chlorophyll production. Nitrogen is the building b lock for many fertilizers. Where
does N come from? Nitrogen is present in vast quantities in the air, making up about
78 percent of the atmosphere. Nitrogen from the air is combined with natural gas in
a complex chemical process to make ammonia.

PHOSPHOURUS/PHOSPHATE (P):
Phosphorus as a nutrient is sometimes most valuable to plants when put near
the seed for early plant health and root growth. Plant root uptake is dependent on an
adequate supply of soil P. Phosphorus is relatively insoluble in water. The water in
most soils must replace all of the P in the soil water 2 to 3 times each day to meet

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the crop’s demand for P. Phosphorus compounds help in directing where energy will
be used. Phosphorus compounds are needed in plant photosynthesis to “repackage”
and transfer energy. Phosphate is also a component of DNA, so it is one of the
building blocks of genes and chromosomes. Phosphorus is involved in seed
germination and helps plants to use water efficiently. Where does P come from?
Phosphorus occurs in natural geological deposits. Deposits can be found in the U.S.
and other parts of the world.

Potassium/Potash (K):
Potassium protects plants against stresses. Potassium protects plants from
cold winter temperatures and helps them to resist invasion by pests such as weeds
and insects. Potassium stops wilting, helps roots stay in one place and assists in
transferring food. Potassium is a regulator.

It activates plant enzymes and ensures the plant uses water efficiently. Potassium is
also responsible for making sure the food you buy is fresh. Where does K come
from? The element potassium is seventh in order of abundance in the Earth’s crust.

Through long-term natural processes K filters into the oceans and seas. Over time,
these bodies of water evaporate, leaving behind mineral deposits. Although some of
these deposits are covered with several thousands of feet of earth, it is mined as
potash or potassium chloride. Potash ore may be used without complex chemical
conversion; just some processing is necessary to remove impurities such as common
salt.

FOOD FOR THE GROWING WORLD

Industry at a glance:
Since 1883 the industry has worked to promote the advances in the
development and application of fertilizers that have helped to feed a hungry world.

24
The revolutionary concept of plant nutrition was born from the discovery of the
biological role of chemical elements in plant nutrition and the need to feed a
growing population concentrated away from the farm in the rising industrial centers
of the world.
Because of modern fertilizers, world food production since 1960 has more
than doubled, keeping pace with the population explosion. Today, the fertilizer
industry is poised to help produce the food that will be needed to feed the world’s
projected 9 billion people in 2025.
The fertilizer industry is essentially concerned with the provision of three
major plant nutrients – nitrogen (N), phosphorous (P) and potassium (K) – in plant
available form. Each nutrient is responsible for different aspects of plant growth
and health.

Fertilizers:
Regulated for quality and safety like other manufactured goods, fertilizers
are regulated for quality and safety at the federal and state levels. Every state in the
country, plus Puerto Rico, has its own fertilizer regulatory program, usually
administered by the state department of agriculture.

State Regulation:
State regulation is concerned with consumer protection, labeling, the
protection of human health and the environment, and the proper handling and
application of fertilizers. Fertilizers are regulated at the state level because soil
conditions vary dramatically from state to state across the country. For example, the
rocky, thin soils of New England are vastly different from the deep, rich black soils
of the Midwest Corn Belt. A different level of fertilizer nutrients in the soil,
different crops (potatoes versus corn, for instance) and different weather and
cropping patterns require state-specific regulation.
Where Science and safety come first the modern commercial fertilizer
industry was founded on the revolutionary scientific discovery in the last part of the
18th century that chemical elements play a direct role in plant nutrition. This initial

25
concept was supported by direct scientific experiment and opened the way for
industrial-scale manufacturing of fertilizers of all types in the 19th century,
beginning with super phosphate in 1843. this was followed by ammonium sulphate,
sodium nitrate and, finally, in the first two decades of the 20th century, the
manufacturing of synthetic nitrogen fertilizers directly from atmospheric nitrogen.

Assessing Fertilizer Safety:

Fertilizer research and development historically have been focused on
maximizing economic crop yields from given rates of nutrient application. Since the
advent of the modern environmental movement in the 1960s, research has also been
concerned with minimizing potentially adverse human health and environmental
effects from fertilizer manufacture and application.
As part of its continuing commitment to safety, in 1996. The Fertilizer
Institute initiated a comprehensive safety assessment project to determine the risks,
if any, of metals in fertilizer. Small amounts of metals are found in phosphate and
potash fertilizers due to their presence in the mined ore bodies. In addition to
phosphate and potash products, some micronutrient fertilizers. Which come from
both mined ores and recycled wastes, also contain metals.

Fertilizers Enrich our World:

Improvements in agricultural efficiency through research and technology
increase food output while protecting the environment and enriching our world in
numerous ways.
Fertilizers feed the growing world. As the world’s population continues to
climb toward an estimated 8.5 billion in 2040, experts estimate that food production
must increase more than two percent annually to even maintain current diets.
Commercial fertilizers will be key in the fight to feed the growing world.
Fertilizers protect the environment. The efficient use of fertilizer also helps
to conserve the natural environment. With fertilizers and modern high yield farming
practices, more food is produced per acre each year, so land may be conserved.
Fertilizers, used properly, help to prevent the widespread loss of habitat that results

26
from wasteful “slash and burn” low-yield farming, which is a major global
environmental threat.

Fertilizers at work in industry:

Aside from their benefits to agriculture, fertilizer components are central to

such industrial process as semiconductor chip making, resin manufacture, cattle feed
production, metal finishing, the manufacture of detergents, fiberglass insulation and
more, even rocket fuel.

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Major Fertilizer ProducingCou
Million metric tons, years ending June 30*
COUNTRY 2003-04 2004

China 20.2 21.5

India 10.1 10.5
United States 13.8 13.5
Russian
4.1 4.1
Federation
Canada 3.7 3.7

United States 9.0 9.0

China 6.4 6.7
28
India 3.0 3.2
Major Fertilizer Consumin
In million metrictons, years ending Ju

COUNTRY 2003-04 2004-05

N
China 23.0 22.9
India 11.0 11.4
U nited
11.2 11.3
States
France 2.5 2.5
Pakistan 2.1 2.1
29
Ph
30
 COMPANY PROFILE

NAGARJUNA GROUP FOUNDER – SRI K.V.K. RAJU

Nagarjuna Group is a dream willed into reality by its visionary Founder Shri
KVK Raju. Shri KVK Raju a first generation technopreneur was born in a humble
agricultural family in Andhra Pradesh on November 28, 1928. On graduating from
Banaras Hindu University and the Madras Institute of Technology he went on to
complete his Master's in Mechanical and Industrial Engineering from Michigan
State University and the University of Minnesota, USA. After a short stint in the
American Industry he returned to India and worked for short periods at Caltex Oil
Refinery, Orient General Industries and Associated Electrical Industries.

Finally, he joined Union Carbide of India and worked with them for 15
years. While working with Union Carbide, KVK's deep-rooted urge to serve society

31
through industry impelled him to start out on his own. Thus was born Nagarjuna
Group in 1973 with an investment of US$ 23 million. The Group has since then
come a long way to become a diversified conglomerate with an asset base of US$
2.5 billion.

Finance:
The total cost of the existing complex is Rs. 2156 corers (Rs. 1186 corers for
Unit-I and Rs. 970 corers for Unit – II). This consists of loan of Rs. 1,162 corers
(Rs. 515 corers for Unit-I and Rs. 647 cooers for Unit – II) sanctioned by IDBI,
IFCI, ICICI, UTI, LIC, GIC and also Banks. The foreign exchange component of
Rs. 781.07 crores was met by the Indian Financial Institutions like IDBI, IFCI &
ICICI and also by Italian Buyers credit. The public and promoters subscribed the
equity portion of Rs. 332.12 corers. The internal reserves of Rs. 323 corers were
utilized for construction of Unit – II.

LIVING IN HARMONY WITH NATURE – NFCL’S

CONTRIBUTION TO ECOLOGY
Environmental protection is an avowed corporate philosophy and the plant is
built on the principle of zero-effluent discharge and is totally eco-friendly. NFCL’s
aim is to maintain ecological harmony, which is NATURE’S INVALUABLE AND
BEAUTIFUL GIFT TO MANKIND.

Man can live in harmony with the environment only when mankind is guided
by respect for the Mother Earth and all living things. Nagarjuna Fertilizers and
Chemicals Limited believe that Industry should exist in harmony with nature. In
pursuance of the corporate vision, and as a humble contribution to the Mother
Nature, the complete ecological system in and around the factory has been changed

32
by establishing a K.V.K.RAJU SUNDARAVANAMU in an area of 747 acres
surrounding the Complex.

The entire area has been covered with 4,50,000 plants consisting of 170
species, transforming a once highly saline marshy area devoid of any vegetation into
a lush green arboreal park. The establishment of 1 KM wide K. V. K. Sundarvanam
is an integral part of overall natural ecological system consisting of eleven water
bodies for fish, habitat for animal life and sanctuary for both indigenous as well as
migratory birds with the factory nestled in the most natural and idyllic surroundings
created with dedication.

An integrated Environmental Management Plan (EMP) has been

incorporated in the basic design itself to ensure strict adherence to International
Standards. The investment on pollution control equipment in the Plant is close to
Rs.110 corers of capital investment and recurring expenditure of Rs.6 corers being
spent annually for operating and maintaining the equipment.

MAIN FEATURES OF ECO-SYSTEM:

A forestation:
740 acres of area has been planted with 4.5 lakhs samplings of 170
species. Weak areas have been planted with selected species based on criteria like
tolerance to salinity; availability from local sources and their ability survive with
least maintenance. A full-fledged nursery with mist chamber and sprinkler
irrigation system has been developed for supply of plants to a forestation
programmer.
Animal Enclosures:
A deer park with spotted deer has been set up in an area of six hectares with
chain-link fence on all sides. Separate enclosures for birds, rabbits and certain other
animals are made available. Some of these animals like jungle cat, fox, jackals,
mongooses, squirrels, bats, snakes, and turtles are also being let out freely in this
eco-system as a part of our animal conservation program.

33
Use of Treated Effluent:
The total treated effluent generated from the factory is being utilized through
a network of over 17 KM of PVC pipeline for sustenance of the eco-system to show
the purity levels of the effluents and the technological efficiency of the plant
equipment.
Awareness Program:
As a part of NFCL’s sincere endeavor to bring awareness about the benefits
of cleaner environment on the general standards of life, company has started
“GREENING THE ROADS” of Kakinada in Phases. As a part of this program,
flowering trees were planted on either side of the 4 km length of roads from
Bhanugudi Junction to Nagamallithota and from Nagamallithota to NFCL. This
program is being extended to further areas in phases.

VALUES STATEMENT OF NFCL COMMITMENT

The Associates of NFCL are committed to continuously evoking customer

delight through constant review and monitoring and delivering proactive value
added solutions. They are also committed to strive for satisfaction of all
stakeholders in a balanced manner through sustainable growth and profitability

Excellence:
They shall continuously strive for Excellence in all dimensions of the
Company through teamwork, creativity and other means.

Ethics:
They shall strive for wholesome business relationships by adhering to the
principles of trusteeship, fair play and transparency in all our dealings that they shall

34
practice a work cultural, which is performance driven and conducive to in proving
discipline, accountability and depth of character, team spirit and honesty in all our
personal and professional relationships.
They shall build a learning organization where creativity, innovation,
entrepreneurship and knowledge sharing are encouraged and fostered actively

Concern:
They consciously recognize that the development of associates is
inextricably linked to the sustainable growth and profitability of the organization.
Therefore, mutual care and concern between the associates and the organization
shall be our abiding value.

NFCL’S VISION STATEMENT

SERVING SOCIETY THROUGH INDUSTRY

“For close to two decades, the employees at NFCL have predominantly been
in the business of manufacturing and marketing Urea, a segment of the plant
Nutrition business space. Given our cumulated experience and strengths in
understanding the farmer, the agriculture, various initiatives taken in the past, the
exposure of Indian agriculture to global economy and therefore the need for Indian
farmers to be globally competitive, have realized the need to provide innovative and
comprehensive Plant Nutrition Solutions.
“The leadership they refer to in our Vision Statement is in terms of providing
innovative and creative solutions.”
NFCL’S MISSION STATEMENT
They shall:
- Pioneer transformation in the approach to plant nutrition
- Deliver holistic plant nutrition solutions to the farmers
- Be the most preferred organization to be associated with

35
 Pioneer transformation in the approach to plant nutrition they shall develop
crop, site and stage specific wholesome plant nutrition solutions. NFCL shall focus
on all necessary initiatives towards this – be it manufacturing technology,
regulatory, logistics and using a mix of several sciences and skills. The most
preferred organization to be associated with in the process of providing these
solutions, NFCL shall delight all the stakeholders – employees, investors, suppliers,
customers and society at large. The stakeholders would prefer to be associated with
us not only for the higher value they offer, but also shall cherish their relationship
with us due to the way they deal with them – with full commitment, responsibility
and accountability.

EMPLOYEE FOCUS:

NFCL’s aim to have the most satisfied employee base by the turn of the
century through its commitment to Personal and professional development of the
individual.

• Rewarding teamwork, innovation and quality behavior

• Through job satisfaction

36
 • Creating and sustaining a close-knit family culture wherein every
individual experience a sense of belonging.

Marketing:
NFCL is operating in Andhra Pradesh, Orissa, West Bengal, Maharastra,
Karnataka, Pond cherry (Yanam territory). A professional team, with a wide range
of products, that include Urea, traded fertilizers (DAP, MOP, Complex fertilizers),
Micro-nutrients, Pesticides, Organic fertilizers and Bio-Pesticides, has taken NFCL
very close to the farmers and made NAGARJUNA a household name among the
farming community.

Keeping pace with the changes in agricultural practices NFCL has developed
organic-fertilizers and bio-pesticides with support from NARDI. A new concept in
fertilizers i.e., Customized Fertilizer Granules (CFGs) has been developed and the
product is in trials.
NFCL’s Development activities focus on imparting training to farmers and
dealers on the latest package of practices in various crop sand technology transfers.
Training programs are carried out both on campus at KVK, Kakinada and off-
campus at villages and towns. A Well-equipped and trained development tem
organizes the programs using audio-visual vans, jeeps, slide projectors and literature
on products and crops, etc. State Governments, Agriculture Universities and the
farming community as a whole have acknowledged the effectiveness of
development programs being carried out by NFCL.

CUSTOMER FOCUS:

In recognition that business is based on quality and integrity, NFCL’s aim to

have the most satisfied customer base by enhancing farmer productivity through
forward integration on the one hand, and through catering to industrial needs on the
other. Unto this end, NFCL shall:

37
• Produce high quality products that give value for money
• Offer, both products and services
• Innovate to satisfy the real needs of customers
• Engage in fair, open and ethical practices.

SHARE HOLDER FOCUS

NFCL aim to keep its shareholders satisfied by:
• Delivering the best long-term return on investment amongst all companies in the
Indian agri-business industry.
• Continuous growth and excellence in business performance.

AWARDS AND HONOURS

38
 “EPIC” Award for Anti-Pollution measures taken by the Industry by
Environment Public interest Committee, Kakinada in 1993.
 Good Housekeeping Award for 1994 by National Safety Council, A.P.
Chapter.
 Best Industrial Canteen Award for 1994 by National Safety Council, A.P.
Chapter.
 Indian Chemical Manufacturer’s Association (ICMA) Award for
“Environmental Control Strategies and Safety in Chemical Plants” for the year
1994.
 Award of Merit for 1994-95 by National Safety Council, U.S.A. for
completing 2 Million Accident Freeman Hours.
 ISO 9002 Certification from Bureau Verities Quality International (BVQI),
Netherlands, in 1995.
 Golden Peacock National Quality Award by Institute of Directors, New
Delhi, India for 1995.
 British Safety Council’s National Safety Award for the five consecutive
years, 1994, 1995, 1996, 1997 & 1998 and also for the year 2000.
 “Rajiv Gandhi Pitra Bhoomi Mitra” Award for 1994-96 by Wasteland
Development Board, Government of India.
 National Safety Award for 1996 by National Safety Council, U.S.A.
 Award for Innovative and Purposeful Program for Social Progress for the
year 1996 by Indian Chemical Manufacturer’s Association (ICMA), Mumbai.
 Merit Award for 1997 and 1998 by Royal Society for the Prevention of
Accident (ROSPA)
 “Best Workers” Welfare (including Family Planning) effort by an Industrial
or Commercial Unit in the State” for the year 1997-98 by Andhra Pradesh
Chambers of Commerce & Industry (FAPCCI)
 Golden Peacock National Award for environmental Management by World
Environment Foundation for the year 1998

39
 Paryavarana Parirakshak Award by Rotary International at Visakhapatnam
for the year 1998
 VANAMITRA – 1999 from Govt., of A.P. for Developing and Maintaining
Greenbelt.
 Achieved 84% in OH & S – Audit conducted by British Safety Council, U.K.
in January 2000.
 Best School Industry Linkage Award 2000 by NCERT – an Autonomous
Organization of Government of India – December 2000.
 Best Environmental Management Plan – 2000-01 in Vizag Zone by Andhra
Pradesh Pollution Control Board, Visakhapatnam.
 National Safety award for 2000-01 from British Safety Council, U.K.
 Best Environmental Improvement Effort by Industries located in the State in
2000-2001 from Federation of A.P. Chamber of Commerce and Industry,
Andhra Pradesh.
 Bronze Award for Occupational Safety for the year 2001 by Royal Society for
the Prevention of Accident (RoSPA), UK
 Commendation Trophy jointly given by National Safety Council, A.P. Chapter
& Director of Factories, A.P. for Implementing OHSAS 18001 in March 2001.
 ‘Environmental Protection Award’ in Nitrogenous Fertilizer plants category
for the year 2001-02 from Fertilizer Association of India, New Delhi.
 “Perfect Record” in Occupational Safety/Health Award Programmer for
operating two million employee hours without occupational injury or illness for
the period from 10.10.01 to 13.11.02 from National Safety Council (NSC) of
USA.
 Commendation prize under the process stream category for its energy
conversation initiatives by Andhra Pradesh productivity council, Hyderabad in
2007.
 National award for “Water efficient unit 2007” by confederation of Indian
industry Hyderabad in 2007.
 Certificate of Appreciation for implementing the process safety management
system (PSMS) by national safety council, A.P. Chapter, Hyderabad in 2008

40
 Green Leaf 2nd runner-up award in the Global Competition for Excellence
and Innovation in Safety, Health and Environment held by International
Fertilizer Industry Association (IFA) in 2009.

 NFCL bagged two awards from the Fertilizer Association of India (FAI), New
Delhi. It won the prestigious FAI Environmental Protection Award in the
nitrogenous fertilizer plants category and stood as joint winner for excellence in
Safety Award. NFCL has been awarded for the 3rd consecutive year and 5th
time in the span of last 8 years and this reckoning has been done out of 31
Nitrogenous Fertilizers Plants in the country.

OTHER GROUP OF COMPANIES OR INSTITUTIONS:

Nagarjuna Agric hem Limited

Nagarjuna Palma India Limited

Nagarjuna Agricultural Research & Development Institute

KVK Raju International Leadership Academy

Nagarjuna Power Corporation Limited

Nagarjuna Haifa India Limited

Nagarjuna Oil Corporation Limited

Bijam Biosciences Limited

Nagarjuna Foundation

FUTURE PLANS OF THE COMPANY

1) To improve the capacity utilization and energy efficiency through
technology up gradation.

41
 2) Switching over to 100% natural gas as raw material instead of Naphtha in
Ammonia plant II
3) To continue to improve environmental performance under the framework of
ISO 14000 – EMS.
4) To enhance the standards in the present quality management system (ISO
9002) by adopting the ISO 9001-2000 revision.
5) To widen the scope and offer technical services to various external agencies
including overs as a excitement.

Diversification:

Nagarjuna Group is on the threshold of major growth phase. Nagarjuna’s aim is not
just to meet the challenges of change, but to be the leaders in all the businesses that
we are in namely, Agri Inputs/Outputs, Energy Sector and Refinery. Nagarjuna
Group will thus have significant presence in the core sectors of the economy, which
will have a multiplier effect on the industrial and socio-economic development of
the country.

Nagarjuna Fertilizers and Chemicals Limited (NFCL) has sought the

Center’s permission to expand the existing production capacity of urea from 12
lakhs metric tones per annum to 17 lakh tones per annum, reports Business
Standard.

NFCL is also undertaking several activities for the development of the

surrounding villages by providing free medical, educational and drinking water
facilities besides supporting the mentally-retarded children.

The Kakinada facility of Nagarjuna Fertilizers and Chemicals Limited

(NFCL), has achieved a record Urea production of 113.1%, producing a total of

42
13.79 lakhs Metric Tones of Urea during 2005-06. The Plant has repeated this
phenomenal feat, producing Urea more than its capacity, for the consecutive second
year. NFCL produces Urea in two units. While the Unit one Produced 7,03,645
Metric Tones, unit two also surpassed its capacity by producing 6,75,571 Metric
Tones making this phenomenal feat repeated during 2005-06 too. Total capacity of
the plant is 11, 94,600 Metric Tones.

The Plant also has achieved this record production at a very optimal
utilization of energy of 5.662 MKcal/MT of Urea against Internal target of 5.67
Mkcal/MT, which is already much lower than the standard Fertilizer Industry
Coordination Committee’s (FICC) norm of 5.712 MKcal/MT. NFCL has one more
reason to celebrate that full production of Urea i.e., 13.79 lakhs Metric Tones has
been dispatched to the farmers.
Along with the production, NFCL has also done well in sales and
distribution wings. It’s products, which include Mahazinc, Zinc Sulphate, zeta
specialty fertilizers besides Urea have been sold out during 2005-06.

NFCL WINS GAS CONSERVATION AWARD FROM GAIL:

Fertilizer facility of Nagarjuna Fertilizers and Chemicals Limited in

Kakinada has been selected for the ‘Award for Excellence in Natural Gas
Conservation’ in the ‘Fertilizers Sector’ category for it’s outstanding contribution
to natural gas conservation in the country during 2004-05.
This annual award has been instituted by Gas Authority of India Limited
(GAIL) as a recognition of the excellent work done by the organizations in Gas
Conservation. GAIL has been conducting a nation-wide Natural Gas Conservation
Program, meant to spread the word of conservation of this precious natural resource.
All the natural gas using industries like power, fertilizer, steel, sponge iron,
transport, glass, ceramic and petrochemicals, would be considered for this award.

43
 This is the 4th achievement of NFCL for it’s excellence in different
departments during 2005. These include; 5 star rating in O.H & S Audit from
British Safety Council, UK. Commendation Award in “Leadership and Excellence
Awards in Safety, Health & Environment (SHE) 2004”, by Confederation of Indian
Industry, Southern Region, Chennai. Re-certification for ISO 9001:2000 by Bureau
Verities Quality International (BVAI) for quality management systems. And NFCL
also received Environment Protection Award from Fertilizers Association of India.
NFCL wins the prestigious Environment Protection Award from the
Fertilizer Association of India
Nagarjuna Fertilizers and Chemicals Limited (NFCL) the flagship company
of the Nagarjuna Group has won the prestigious FAI (Fertilizer Association of
India) Environment Protection Award in the Nitrogenous fertilizer plants category
for the year 2004-05. NFCL had won the same award for 2001-02 also. Going
much beyond the statutory requirements of law for environment protection, NFCL
has implemented a comprehensive protection plan in its plant at Kakinada. NFCL
has been widely acknowledged for its Commitment to the betterment of
Environment and this award further adds to the long list of recognition.
NFCL has also won two more awards from FAI. A video film titled “The
Sugarcane” produced by NFCL was adjudged Runner-up in the Annual Video
Film Competition by FAI for the year 2004-05. The video film has been
developed with the objective to transfer technology and to enhance the yield of
sugarcane farmers in Andhra Pradesh. For NFCL, this is the second consecutive
year of winning in this category. An article titled “From Products to Solutions –
Exploring Opportunities” published in the September 2005 issue of the Indian
Journal of Fertilizers was awarded the Second prize in the category of Shriram
Award for Best article in Marketing.

Bureau Verities Quality International (BVQI) awards re-certification of ISO

9001:2000 for Nagarjuna Fertilizers and Chemicals Limited.
Nagarjuna Fertilizers and Chemicals Limited (NFCL) has been re-certified
of ISO 9001:2000 by Bureau Verities Quality International (BVQI), for its Quality

44
Management Systems. The Flagship Company of the Nagarjuna Group has already
been an ISO 9001:2000 organization since 1995. This re-certification, which is
valid up to February 2008, is only an extension of recognition for company’s
excellent quality management systems.
BVQI team has done the re-certification audit during February at NFCL
plant Kakinada. After conducting audit in Plant Operations and Area Marketing
Offices BVQI sent a certificate to NFCL in which it mentioned “Quality
Management System of the Nagarjuna Fertilizers and Chemicals Limited has been
audited and found to be in accordance with the requirements of the standards ISO
9001:2000”.

BVQI is today the most widely recognized certification body in the world,
offering solutions in the key strategic fields of companies operations: Quality,
Health and Safety, Environment and Social Responsibility. It is recognized by more
than 30 national and international accreditation bodies across the world to deliver
ISO 9001 certification.

Nagarjuna Fertilizers and Chemicals Limited Awarded the prestigious 5 star

Rating by the British Safety Council, U.K:
Nagarjuna Fertilizers and Chemicals Limited (NFCL), the flagship company
of the Nagarjuna Group has been awarded the highly coveted 5 star rating by the
British Safety Council, U.K. After a detailed Health and Safety Management System
Audit conducted during the month of January 2005, the British Safety Council has
awarded an ‘Excellent’ rating (Score of 92.39%) to NFCL’s manufacturing facility
at Kakinada. The audit covered eight areas of NFCL’s management systems
leading to best practices, Fire Control Systems, Measurement and Control Systems,
Workplace implementation, Verification, Best practice and Continuous
improvement.
The British Safety Council (BSC) is one of the world’s
leading occupational health, safety and environmental organizations. BSC’s Five
Star Health and Safety Management System Audit is a benchmark for best practices.

45
It provides a detailed examination of the organization’s current practices, and gives
a comprehensive report and plan for implementing, monitoring and achieving
continuous improvement. It is based on the Business excellence Model and goes
beyond HS(G)65 and OHSAS 18001 to measure how far an organization has gone
towards achieving best practice.

Information Technology & Communications Department, Government of

Andhra Pradesh signs MOU with IKisan Limited
To provide agriculture related information and services through Rajiv Internet
Village Centers / (RSDPs/Rural eSeva Centers)

In its efforts towards Grameen Vikas aimed at alleviating rural poverty and
ensuring agricultural development, the Information Technology & Communications
Department, Government of Andhra Pradesh today signed a MOU with Ikisan
Limited to provide agricultural related information and services to the vast farming
community of the state through Rajiv Internet Village Centers (RSDPs/Rural e-Seva
Centers).

The Information Technology and Communications Department has already

set up 1200 kiosks spreading across the state under the Rural Service Delivery Point
Project (RSDP) in rural areas to serve as centers of e-commerce and information
dissemination. Ikisan Limited has partnered with the Information Technology &
Communications Department to provide agriculture information software and
services in these kiosks. The modules will be in Telugu and voice enabled
addressing the needs of rural population comprising mainly of farmers. The kiosk
operators will be provided training by Ikisan Limited enabling them to effectively
utilize the software and other applications for the benefit of agriculturists.
Ikisan Limited is a pioneer in Agri-Portals in India. A Nagarjuna Group
initiative, Ikisan.com is a comprehensive Agri Portal addressing the Information,
knowledge and business requirements of various players in the Agri arena viz.,
Farmers, Trade Channel partners and Agri Input/Output companies. Leveraging

46
Information Technology and extensive field presence, Ikisan is positioned as an
Information/Output companies. Leveraging Information Technology and extensive
field presence, Ikisan is positioned as an Information/Knowledge exchange and an
e-Marketplace. An integrated agriculture group, Nagarjuna has core competencies
in the fields of plant nutrition, plant protection, and irrigation and farm services.

NFCL Values:
Deliver solutions that will please our customers deliver returns that motivate
out investors take actions that strengthen us and inspire the best in others (by setting
an example in relationship, integrity, honesty, humility and hard work)
By understanding the deep and fundamental needs of our people, our
customers our Investors and our Ecosystem (Alliances, Community and
Environment).

The Group:
Founded in 1973 by Shri K.V.K. Raju with a modest investment of US$ 23
million, the Nagarjuna Group Today is a prominent industrial house in India with an
asset base of US$ 2.5 billion.
1974: Birth of a business group that pioneered several core sector enterprises
in the coming decades. Starting with manufacturing steel, Nagarjuna Steels Limited
was launched.
1985: With focus on agriculture input business started plant nutrition
business with Nagarjuna Fertilizers and Chemicals Limited
1992: Forayed into the Crop Protection Business with Investments in
Pesticide Formulations manufacturing followed by Technical Grade Manufacturing
in the year 1994.
1995: Ventured into Energy Sector. Entered into power generation by
setting up Nagarjuna Power Corporation Limited.
1997: Entered into petroleum by setting up Nagarjuna Oil Corporation
Limited.

47
Consolidating its core activities, today the Group’s major operations cover Agri and
Energy sectors.
It has taken several welfare measures to improve the general working
conditions. They are given below.

48
49
NFCL OBJECTIVES:

 Performance management
 High performance potential
 Individual growth potential
 Belief in Youth
 High Result Orientation
 Law procedure orientation
 Entrepreneurial Development
 Distinct Nagarjuna Group Ethos
 High sense of respect for value of time and money Harmonious
employee relations
 Development of Human Resources on a continuous basis
 Highest importance to human values
 Objectives assessment of individual performance
 Disciplined behavior of all employees
 Belief in system management
 Belief dynamism
 Belief in multi skilled concept
 Continuous monitoring cost control

\
FINANCE DEPARTMENT IN NFCL PLANT:

Following are the sections in the finance department:

• Bill section
• Cash and bank section
• General Accounts
• Costing and FICC
(Fertilizers industry co-ordinate committee)

50
 • CPC
• Indirect Taxation etc.

BILL SECTION:

This section receives bills from various departments in the plant. It checks the invoices as
per the purchase order/service order terms and passes. The passed vouchers are sending to
cash and bank section.

CASH AND BANK SECTION:

The section makes payments as per due dates in mode of cheque or DD. This section
decides that bills have to be paid in the order of importance. Travel bills and imprest bills
are paid to employees in mode of Cash.

GENERAL ACCOUNTS SECTION:

This section is also responsible to the maintenance of the accounts for the purpose of the all
audits. Budget preparation initiating necessary control mechanism is also part & parcel of
this department. It looks after the entire transport bills payments. All addition and deletions
of assets related to Plant are done by this section.

COSTING AND FICC:

Fertilizers industry co-ordination committee is formed by members from different

departments like agriculture departments, ministry of finance and representation of big
fertilizer industry.
FICC section in the finance department co-ordinates with other departments
and calculates the production cost of urea and with proper documentation submits it to the

51
FICC to fix the subsidy. It is also responsible for maintaining other statutory requirements
and sends various reports to FICC.

CPC: -
They prepare salaries of the employees and other after statutory payments like P.F, E.P.F,
and E.S.I.

52
53
54
 Capital Budgeting
Meaning of Capital Budgeting
Capital budgeting is primarily concerned with sizable investments in long-
term assets. These assets may be tangible items such as property, plant or equipment
or intangible ones such as new technology, patents or trademarks. Investments in
processes such as research, design, development and testing – through which new
technology and new products are created – may also be viewed as investments in
intangible assets. Irrespective of whether the investments are in tangible or
intangible assets, a capital investment project can be distinguished from recurrent
expenditures by two features. One is that such projects are significantly large. The
other is that they are generally long-lived projects with their benefits or cash flows
spreading over many years. Sizable, long-term investments in tangible or intangible
assets have long-term consequences. An investment today will determine the firm’s
strategic position many years hence.

These investments also have a considerable impact on the organization’s

future cash flows and the risk associated with those cash flows. Capital budgeting
decisions thus have a long range impact on the firm’s performance and they are
critical to the firm’s success or failure.

Process of capital budgeting:

55
 • Replacement
• Contingent investment proposals

Independent:- It includes all such investment proposals as of being considered by

the management for performing different tasks within the organization. Investments
in machinery, automobiles, buildings, parking lot, and recreation and so on are the
examples of independent investment proposals. Acceptance of each of these projects
is done on its own merit without depending on other projects.

Dependent:- The decisions on one project effect in certain way the decisions on
other projects if they are dependent.

56
 Mutual exclusive:- These kind of proposing connote those proposals which
represent alternative methods of doing the same job. In case of proposal is accepted ,
the need to accept the other is ruled out.

TECHNIQUES OF INVESTMENT APPRAISAL

There are many methods of evaluating profitability of capital investment

proposals. The risk involved in the proposal cannot be ignored because profitability
and risk are directly related, i.e. higher the profitability, greater the risk vice-versa.
The various commonly used methods are as follows;

(A) Traditional (or) Non-discounted cash flows

(B) Modern (or) Discounted cash flows

CAPITAL BUDGETING METHODS

TRADITIONAL MODERN
NON DISCOUNTED DISCOUNTED CASH FLOW

Payback Accounting Net Present Internal Rate Profitability

Period Rate of Return Value of Return Index

PAYBACK PERIOD:
The Payback sometimes called as Pay of period method represents the period
in which the total investment in permanent assets pay back it self. This method is
based on the principal that every capital expenditure pay itself back with in a certain
period out of the additional earnings generated from the capital assets. Thus it

57
measures the period of time for the original cost of the person to be recover from the
additional earning of the projects itself.

Advantages of Payback Period

• It is easy to understand and apply. The concept of recovery is familiar to
every decision maker.
• Business enterprises facing uncertainty both of product and technology will
benefit by the use of payback period method since the stress in this technique
is on early recovery of investment. So enterprises facing technological
obsolescence and product obsolescence as in electronics/computer industry
prefer payback period method.

Disadvantages of Payback Period

• The time value of money is ignored. For example, in the case of project
• A Rs. 500 received at the end of 2nd and 3rd year are given same
weightage. Broadly a rupee received in the first year and during any
other year within the payback period is given same weight. But it is
common knowledge that a rupee received today has higher value than a
rupee to be received in future.
• But this drawback can be set right by using the discounted payback
period method. The discounted payback period method looks at recovery
of initial investment after considering the time value of inflows.

ACCOUNTING RATE OF RETURN

Accounting Rate of Return is the rate arrived at by expressing the average
annual net profit (after tax) as given in the income statement as a percentage of the
total investment or average investment. The accounting rate of return is based on
accounting profits. Accounting profits are different from the cash flows from a

58
project and hence, in many instances, accounting rate of return might not be used as
a project evaluation decision. Accounting rate of return does find a place in business
decision making when the returns expected are accounting profits and not merely
the cash flows.

Advantages of Accounting Rate of Return:

• It is easy to calculate
• The percentage return is more familiar to the executives

Disadvantages of Accounting Rate of Return:

• Time value of money is not considered here.

NET PRESENT VALUE

The Net Present Value method is a modern method of evaluating
investment proposals. This method takes into consideration the time value of money
and attempts to calculate the return of investments by introducing the factor of time
element. The Net Present values flows in and flows out of cash occurring during the
entire life of the project is determined separately for each year by discounting these
flows by the firms cost of capital. If the net present value is positive or zero that is
when present value of cash out flow the proposal may be accepted but in case the
present value of cash inflow is less then the present value of cash out flow the
proposal should be rejected.

Advantages of the Net Present Value Method

• It recognizes the time value of money and is suitable to be applied in a
situation with uniform cash outflows and uneven cash inflows or cash
flows at different period of time.
• It takes into account the earnings over the entire life of the project and
the true profitability of the investment proposal can be evaluated.
• It takes into consideration the objective of maximum profitability.

59
Disadvantages of the Net Present Value Method
• As compared to the traditional methods, the net present value method is
more difficult to understand and operate.
• It is not easy to determine an appropriate discount rate.

INTERNAL RATE OF RETURN

The internal rate of return method is also a modern technique of capital
budgeting that takes into account the time value of money. It is also known as
‘time adjusted rate of return’, ‘discounted cash flow’, ‘discounted rate of return’,
‘yield method’. The internal rate of return can be defined as that rate of discount
at which the present value of cash-inflows is equal to the present value of cash
outflows.

Advantages of Internal Rate of Return Method

• Like the net present value method, it takes into account the time value of
money and can be usefully applied in situations with even as well as un
even cash flow at different periods of time.
• It considers the profitability of the project for its entire economic life and
hence enables evaluation of true profitability.

Disadvantages of Internal Rate of Return Method

• It is difficult to understand and is the most difficult method of evaluation
of investment proposals.
• This method is based upon the assumption that the earnings are
reinvested at the internal rate of return for the remaining life of the
project, which is not a justified assumption particularly when the average
rate of return earned by the firm is not close to the internal rate of return.

60
PROFITABILITY INDEX METHOD
It is also a time-adjusted method of the evaluating the investment
proposal. Profitability index also called, as a benefit cost ratio is the relationship
between the present value of cash in flow and the present value of cash out flows.

Profitability Index = Present value of cash inflows

Present value of cash outflows

61
 Co2 Recovery Plant

The CDR plant has been installed as a part of Revamp Phase-2 for capacity
augmentation of the plants keeping in view the availability of gas supplies from RIL
which is commenced from April 9th onwards. As we may be aware NFCL has two
units to produce urea fertilizer and the unit I is operated on gas while the unit II is
operated mainly on Naptha because of shortage of natural gas from the current
sources in KG basin from ONGC and RAVVA JV and marketed through GAIL.
Currently, unit I is operated is at higher loads than the reassessed and recognized
capacity of the plant by the Government. While unit II is operated at the reassessed
capacity only which is around 6LMT per annum. As there is no benefit to produce
extra capacity of urea with naphtha inputs. On availability of RIL Gas, the
operations of unit II will also be switched over gaseous input and it will help to
increase loads in unit II also. This CDR project was ordered on M/s. MHI, Japan and
Tecnimont ICB, Mumbai on lump sum turnkey (LSTK) basis. The scope of MHI
comprised of licensing of process and basic know-hoe, supply of some proprietary
items while tecnimont ICB has been ordered for engineering, procurement and
construction scope of the project. The total installed cost of the project has been
around Rs.100 crores , with close co-ordination amongst the key agencies viz., MHI,
TICB and NFCL, the project has been completed in a record time of around 20
months.

This CDR Project was taken up as a part of Revamp-2 and in addition to this project,
there are some additional De-bottlenecking Schemes to be implemented in
Ammonia & Urea plants and cooling tower to achieve better asset utilization of
capacities for which procurement action is already in advanced stage and this will be
hooked-up in annual Turnaround of plants, scheduled in Aug / Sep 09.

The De-bottlenecking Schemes being executed will facilitate further increase in

capacity and improvement in energy input and will add to the reliability of plants.

62
As we know, Urea Fertilizer Industry is under the control regime of Department of
Fertilizer, Ministry of Chemicals & fertilizers, Govt. of India, but the domestic
production in the country is short by about 25% of the demand of Urea fertilizers
(around 5 to 6 Million Tons per annum) and the same is being bridged through
imports by the GOI at a huge cost. In order to contribute to reduce the shortfall of
urea, we have been contemplating to do the Revamp-De-bottlenecking of the plants
in order to augment the capacity of plants at much cheaper cost as compare to
Import cost.

In fact, under new pricing scheme-3, of dept., of Fertilizers, GOI effective

from 1st Oct 06, some incentives were approved for the additional production
beyond the reassessed capacity of plants. In anticipation of this policy, we had
actively initiated revamp/de-bottlenecking schemes phase wise in order to augment
the capacity of the existing plants from the year 2005 itself as per the feasibility
reports of the consultants.

These were planned phase wise as per the financial capacity of the company. The
details of the revamps already carried out and being carried out and also the one in
the study state are as follows;

1. Phase 1 Revamp (OPTION 1) : It was done and implemented in the year 07-08
which helped us to increase plant production capacity in Unit-1 by about 40,000
MT per annum during the year and around 50,000 MT during the full year 08-09
and the total capacity outlay for these schemes around Rs.55 crores.

2. Phase 2 Revamp (OPTION 2): is in process at an approximate cost of Rs. 200

crores which includes the CDR plant also as explained above. Part benefit will start
accruing from the commissioning of CDR on availability of gas from RIL and the
full benefits will be revitalized w.e.f Oct 09 and it will increase the capacity further
by about 2.0 LMT of urea per anum. The total annual production is expected to

63
increase to 15.66 LMT from the present leavel of 13.70 LMT in the current year.
Besides, it will improve the energy consumption also. The total operations will be
on gaseous inputs which needs lesser working capital as naphtha is much costlier
than gas. The total revamp schemes have the validation of projects and development
India limited, a renowned public sector undertaking.

3. Phase-3 Revamp (OPTION3): the proposal for increasing the capacity further
by approximately 90000 MT per annum, by installing certain equipment and
implementing a few additional schemes mainly in Ammonia plants in under study of
the consultants, namely, M/S Haldor Topsoe of Denmark. Prima-facie, the
investment is estimated around Rs 180 crores and when completed will lead us to a
total production level of 16.56 LMT of Urea per annum.

The Govt. has noticed certain incentives on 4th Sep 08 for the additional production
beyond a cut-off level for each plant linking the concessions with import Party Price
(IPP) in the New Urea Investment policy. On implementation of phase 2 and phase
3revamps, the qualifying additional production will fetch us incentives over and
above the normal gains under NPS-3 on group concessions basis and the
profitability of the company is likely to improve in lieu of these Revamps.

Incidentally, the investments through Revamps per MT of additional Urea capacity

in the in plants is much lower than the corresponding investments in Grass-Root or
full expansion plants. That is why; we have opted for this route.

4.12 Application of capital budgeting techniques for CDR and

Revamp project and its computation:-

Calculation for option 1:-

64
 capital Rs Lacs
Capital cost of equipment 11579
Loan (75%) 8684
Own(25%) 2895
ROI 11
Capital cost of equipment including IDC %
1224
8

Loan operating balance in 1 year of operation

9353

Cash flows of option 1 is as follows:-

65
 Financial 09- 10- 11- 12- 13- 14- 15- 16- 17- 18-
Additional year 10 11 12 13 14 15 16 17 18 19
income:- 1828 1828 1828 1828 1828 1828 1828 1828 1828 1828

Less: Tax 9 41
0 0 0 0 0 0 0 5 2 475
Interest
1029 941 853 754 655 545 402 259 116 6
LoanRepaymen
t 80 80 90 90
0 0 0 0 1000 1300 1300 1300 1000 53
Net cash flows
after Loan ,Tax
And Int -1 87 75 174 173 -17 126 174 300 1294

Net cash flows

after Tax only 1828 1828 1828 1828 1828 1828 1828 1733 1416 1353

Income tax:-

66
 Financial 09-10 10- 11-12 12-13 13-14 14-15 15-16 16-17 17-18 18-19
year 11
Income tax:-
Profit 1828 1828 1828 1828 1828 1828 1828 1828 1828 1828
before
int,dep
1837 1562 1327 1128 959 815 693 589 501 426
Tax dep
1029 941 853 754 655 545 402 259 116 6
Interest
-1038 -674 -352 -54 214 468 734 980 1212 1397
Taxable
profit for
the year
-1038 -1712 -2064 -2118 -1903 -1435 -701 279 1212 1397
Taxable
profit- with
c/f impact

Income tax 0 0 0 0 0 0 0 95 412 475

@33.99%

Loan schedule:-
Financial 09- 10- 11- 12- 13- 14- 15- 16- 17- 18-
year 10 11 12 13 14 15 16 17 18 19

Opening 9353 9353 8553 7753 6853 5953 4953 3653 2353 1053 53
balance

Repayment 800 800 900 900 1000 1300 1300 1300 1000 53

Interest 1029 941 853 754 655 545 402 259 116 6

Closing
8553 7753 6853 5953 4953 3653 2353 1053 53 0
balance

67
68
Calculation for option 2:-

capital Rs Lacs
Capital cost of equipment 14230
Loan (75%) 1067
Own(25%) 3
ROI 3558
Capital cost of equipment including IDC 11
%
1505
2

Loan operating balance in 1 year of operation

11494

Cash flows of option 2 is as follows:-

69
 Financial 09- 10- 11- 12- 13- 14- 15- 16- 17- 18-
Additional year 10 11 12 13 14 15 16 17 18 19
income:-
3277 3277 3277 3277 3277 3277 3277 3277 3277 3277
Less: Tax

Interest 0 0 0 0 0 0 0 0 0 0

LoanRepaymen 126 104 82 6 38

t 4 4 4 04 4 0 0 0 0 0

20 200 200 20 200

Net cash flows 00 0 0 00 0 0 0 0 0 0
after Loan ,Tax
And Int
21 45 67 24 22 22 22 222
Net cash flows 13 3 3 3 893 67 68 52 39 7
after Tax only

3277 3277 3277 3277 3277 2467 2268 2252 2239 2227

Income tax:-
Financial 09-10 10- 11-12 12-13 13-14 14-15 15-16 16-17 17-18 18-19
year 11
Income tax:-
Profit 3277 3277 3277 3277 3277 3277 3277 3277 3277 3277
before
int,dep
10418 695 591 502 427 363 308 262 223 189
Tax dep
1264 1044 824 604 384 164 0 0 0 0
Interest
-8405 1538 1862 2171 2466 2750 2969 3015 3055 3088
Taxable
profit for
the year
-8405 -6867 -5005 -2834 -368 2382 2969 3015 3055 3088

Taxable
profit- with
c/f impact
0 0 0 0 0 810 1009 1025 1038 1050
Income tax
@33.99%

70
Loan schedule:-
Financial 09-10 10- 11- 12-13 13- 14-15 15- 16- 17- 18-
year 11 12 14 16 17 18 19

Opening 11494 11494 8553 7494 5494 3494 1494 0 0 0 0

balance

Repayment 2000 2000 2000 2000 2000 1494 0 0 0 0

Interest 1264 1044 824 604 384 164 0 0 0 0

Closing
9494 7494 5494 3494 1494 0 0 0 0 0
balance

71
NPV Calculation for option 2

Calculation for option 3:-

72
 capital Rs Lacs
Capital cost of equipment 17017
Loan (75%) 1276
Own(25%) 3
ROI- mini revamp 4254
ROI-CDR 11
Capital cost of equipment including IDC %
11
%
1800
0

Loan operating balance in 1 year of operation

13745

Working for IDC

LOAN
Year CDR Mini Revamp Total
2007-08 1361 1191 2553
2008-09 5446 4765 10210
(A) 6807 5956 12763

IDC

73
 Year CDR Revamp Total
2007-08 225 197 421
2008-09 300 262 562

(B) 524 459 983

(A+B) 7331 6414 13745

Cash flows of option 2 is as follows:-

Financial 09- 10- 11- 12- 13- 14- 15- 16- 17- 18-
Additional year 10 11 12 13 14 15 16 17 18 19
income:-
3277 3277 3277 3277 3277 3277 3277 3277 3277 3277
Less: Tax

Interest 0 0 0 0 0 0 0 0 0 0

LoanRepaymen 126 104 82 6 38

t 4 4 4 04 4 0 0 0 0 0

20 200 200 20 200

Net cash flows 00 0 0 00 0 0 0 0 0 0
after Loan ,Tax
And Int
21 45 67 24 22 22 22 222
Net cash flows 13 3 3 3 893 67 68 52 39 7
after Tax only

3277 3277 3277 3277 3277 2467 2268 2252 2239 2227

Income tax:-

74
 Financial 09-10 10- 11-12 12-13 13-14 14-15 15-16 16-17 17-18 18-19
year 11
Income tax:-
Profit 3277 3277 3277 3277 3277 3277 3277 3277 3277 3277
before
int,dep
10418 695 591 502 427 363 308 262 223 189
Tax dep
1264 1044 824 604 384 164 0 0 0 0
Interest
-8405 1538 1862 2171 2466 2750 2969 3015 3055 3088
Taxable
profit for
the year -8405 -6867 -5005 -2834 -368 2382 2969 3015 3055 3088

Taxable
profit- with
c/f impact 0 0 0 0 0 810 1009 1025 1038 1050

Income tax
@33.99%

Loan schedule:-

Financial 09-10 10- 11-12 12-13 13-14 14-15 15- 16- 17- 18-
year 11 16 17 18 19

Opening 11494 11494 8553 7494 5494 3494 1494 0 0 0 0

balance

Repayment 2000 2000 2000 2000 2000 1494 0 0 0 0

Interest 1264 1044 824 604 384 64 0 0 0 0

Closing
9494 7494 5494 3494 1494 0 0 0 0 0
balance

75
 Payback period of option 3 is 2years 2 months which is very short
period when compared with option1 and option 2 to recover the invested
amount. So option3 is better.

76
 NPV analysis of mutually independent projects

The –ve NPV indicates that over its economic life, the cash
inflows generated by investment won’t recover the original outlay and it
can’t earn the desired return. In option 1 and option 2 cases NPV is less
than ZERO so reject those projects and in option 3 NPV is positive that
indicates that over its economic life time, the cash inflows generated by
investment recover the original outlay. It earns the desired return and in
addition provide cushion of excess value. So accept option 3.

77
 Replacement Project

NFCL wants to replace third row tubes which costs to the company is
400000/- the installation and maintenance charges are 100000, 120000
pa respectively .
If the company does not install the tubes company would incurred a loss
of 5000/- per day
Note:- assume company expected rate of returns 10% and also at 15%

Machinery cost 400000,

Installation expenses 100000
------------
Cost of machinery 500000

(-) maintaince (10000 p.m) 120000

-----------
Total project cost 620000
-----------

If the above mentioned project is not installed the loss incurring to the
company is 5000/- per month.

So the company thought that the machine should be installed the

necessary replacement benefit to the company is as follows.

78
 Cash flows 5000*365 = 1825000
Discount factor (10%) 1658925

Project cost = 620000

-----------
NPV 1038925
-----------
--
Discount factor (15%) 1587750

Project cost = 620000

-----------
NPV 967750
-----------
--

By using NPV method if the cash flows are the savings of the
company discount rate at 10% the NPV is 1038925 or at 15% then the
NPV 967750.

79
1. Balance Sheet as at March 31, 2009 Rs.Lakhs

80
81
82
83
INTERPETATION:

1. NAPTHA consumption is not there for process plant I for

every year

2. NAPTHA consumption has been increased according to

the production it indicates that process plant II is majorly

using NAPTHA than NG

3. NATURAL GAS is supplied by O.N.G.C

4. NAPTHA is used in plant II only

5. Previously NFCL uses NAFTA, presently it is using Urea.

6. Urea is supplied from GAIL and also from Gadimoga.

7. Packing material cost is variable cost it will varies

according production.

8. We are getting power form the A.P.S.E.B and we are

getting by power by own.

84
 FINDINGS

1. The production of second plant is started in the year 1998.

1. The revenue budget of the company is increasing regularly even though the

share of the departments has same every year.

2. Catalyst budget is comedown because of the introduction of new technology.

3. The packing cost has been increase according to change of production.

4. The company is trying to decrease the consumption of NAPHTHA

because its cost is more than NATURAL GAS.

5. The company has cut down the consumption of LSHS.

6. The company is using SAP.

7. The company is production-oriented so its capital expenditure is majorly

allocated to the Mechanical and Maintains department

8. The Company is concentrating on the Nature so it is trying to increase the green belt

we can say that this is eco friendly organization.

9. In this year 2008-09 as per the Business world ratings the company is in the 6th

place in fertilizers industry.

10. In overall ranking the company is in the 71st position.

85
 SUGGESTIONS

1. Company may be able to decrease the bagging cost. It can save the

amount in lakhs.

2. The world is very competitive but the company is spending more

money on ecological system so that can affect its profitability.

BIBILOGRAPHY
Financial management : RUSTAGI

REFERENCES

http://www.nagarjunafertilizers.com
http://www.nagarjuna.com
http://www.wikipedia.com
http://www.google.com

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